Better Management,
Bigger Profits!

Why Small Businesses Usually Under-Perform

In the 1980's the Board of AWA, a large diversified electronics and trading company, found that their executive staff (the people they paid to run the company on a day-to-day basis) had gone close to bankrupting their company through injudicious (the executive said "unlucky") foreign currency trades.

The Board sued the Company's Auditors for not alerting them to their exposure in a timely fashion - and the Auditors countersued the Board for negligence in the performance of their duties in acquitting their directorial responsibilities.

Justice Rogers, Chief Justice of the Commercial Division of the Supreme Court of NSW in hearing the case found himself faced with an unexpected challenge; he found there were very few guidelines available to the Court - or to Boards - as to just what their duties were, and that those guidelines that did exist were often contradictory or unclear!

J Rogers' observations on the AWA case lead to Professor Fred Hilmer chairing an Independent Working Party into Corporate Governance to clarify the relative roles and responsibilities of those who direct Companies, and those who run them.

I found the working party's report (outlined in a small, rather dry little book, cutely titled "Strictly Boardroom") made a lot of sense to me when looking at the challenges faced by our corporate clients but I think what started me seeing the parallels between the big and the small end of town was Hilmer's focus on the generally poor performance of many large public companies in generating profits for their shareholders.

Putting together the fact that ATO figures show the average SMB owner makes around 4-5% net profit and the fact that a significant percentage of our Business Analyses show similar or worse figures prior to our starting work with clients, the penny dropped for me that some of Prof Hilmer's observations are as relevant for our small and medium business (SMB) clients as they are for public companies, and so I'm taking the opportunity to share them with you here, along with a few observations of my own.

To begin with, many of our SMB Clients wear both hats of being the Director and the Manager of their business. So the person under the Director's hat, who is responsible for setting the goals for the enterprise and enforcing performance relative to attaining those goals, is the same person who, when wearing the Manager's hat, is mired in the day-to-day running of the business. As Manager he understands all the reasons and excuses for his own under-performance, distraction and loss of direction that are responsible for failing to achieve the Director's goals.

How do you "fix" this apparently irresolvable challenge? Fairly simply, in fact: Separate your roles as Director of your Company (or business) and as Manager of its day-to-day running, and allocate specific times - and quarantined "head space" - to fulfilling these complementary yet antagonistic roles.

So let's take a look at how the good Professor's recommendations might shape up when applied to carrying out your Directorial duties in your own business:

Duty 1
Review and approve management's proposed strategy.

What the average SMB owner does: Has no formal and precise performance goals and therefore, no formal strategy or written business plan against which to measure day-to-day priorities and activities.

ProfiTune Option: Set clear and precise profit performance goals for the business; assess and select strategies to achieve those profits; write out your business plan complete with milestones (sub-goals) and review points. Constantly refer to the plan, and judge your performance against it.

Result: The business owner allocates time in which to step back from the day-to-day activity of working in the business to check its progress against "the original plan" and from that perspective can see what is working, what is not, and what must change.

Your Manager will then be able to step back into the business with valuable feedback and input from your Director.

Duty 2
The Directors should appoint and reward the Executive on the basis of performance.

What the average SMB owner does: Takes a fixed wage each week, just like any other staff member (after all, they have to run a home too, and seek some degree of certainty in their private budgeting.)

ProfiTune Option: Set monthly performance goals; pay yourself a low weekly base wage and top it up at the end of each month with a performance bonus based on your performance.

Result: You'll be well and truly attuned to how the business is going; far more focused on performance; and more motivated than ever before when you receive your performance bonus each month. Of course, if you don't get a bonus, you know immediately that change is needed, and are far more likely to act in a timely manner to lift performance.

Your Director will have ensured that your Manager is suitably focused and motivated.

Duty 3
Approve and foster corporate culture.

What the average SMB owner does: Head down, bum up, expecting staff to read their mind, follow their lead, understand their standards and wishes, and do as they do.

ProfiTune Option: Spend a little time deciding just what values and behaviours you want to promote and develop within your team, then give some thought as to how you might install those in a deliberate and efficient manner.

Result: Everyone on the same page, singing the same song, sharing the same values. Less friction; less inefficiencies; less stress; greater opportunities to reward and recognise your team's performance. More productivity!

Your Director ensures your Manager installs a deliberate and desired culture, as opposed to letting one grow like mould on old cheese.

Duty 4
Monitor the management of all business risks.

What the average SMB owner does: Save time on the management of risk (because "we just don't have time for that stuff"), and then blow a multiple of the time saved on handling the crises as they occur.

ProfiTune Option: Create a basic checklist of the common risks faced by the majority of businesses, and set about using your ingenuity and budgeting time to apply it to minimising your risks in both a time and cost-effective manner. Then review your changing risk exposure in a routine and regular (quarterly?) manner.

(For a free "Basic Business Risks Checklist" click here.)

Result: Your risks won't "go away" but they are far less likely to damage you or your business; less expense, less stress, happier staff, more certainty.

Your Director will ensure that your Manager is duly protecting the Director's assets.

Duty 5
Establish committees to assist the Board.

What the average SMB owner does: Works alone in attempting to discern where the market is going; what they can do best; how to improve processes; how to manage expenses; how to  ... well, "how to" just about everything!

ProfiTune Option: Formally chair meetings at which your staff can contribute their thoughts and observations on the business in a regular and structured way. Do the same with key customers and/or suppliers in brainstorming sessions, feedback panels, market research groups, etc.

Result: You will tap into a free storehouse of great knowledge and goodwill that has the potential to take your business out of the mundane and into the ranks of the winners.

Your Manager will be guiding your Director with accurate, current and timely information so that you can both work together to improve the performance of your business.

Complementary Yet Separate Roles

As the Director, your tasks are to:

1. Clarify exactly what you want from your business - your Desired End Result.
2. Determine what recurrent measurable results (including profits) that the business has to deliver to you to achieve that Desired End Result.
3. Set clear and concise performance goals (precise, dated, etc)
4. Decide on a measurement regime - monthly, weekly, quarterly.
5. Coach management to improve their performance.
6. Measure as and when planned.
7. Reward or replace the manager.

As the Manager, your tasks are to:

1. Accept responsibility for producing the recurrent measurable results.
2. Create a plan to achieve the concise performance goals.
3. Seek the knowledge and skills to produce the goals.
4. Measure your performance against the goals.
5. If you consistently fail to achieve the goals, resign one of your positions!

And that, as they say, is where I come in!
 

Putting a Coach on Your Board?

So, if your "Manager" is not achieving the goals that your "Director" (and/or Shareholder) wants, it may be time to beef up your Board with a new Director - one who will help you set clear, concise and realistic goals; one who will coach you to lift your performance; one who will hold you accountable for achieving your goals - and one who will even suggest that you occasionally reward yourself for a job well done!

Is it time for you to talk to a Coach - and to join the ranks of the high performers?
 

A Chilly Future - How Much Do You Need To Be Financially Free?

The ProfiTune team is sometimes criticised for being too conservative when it comes to estimating returns on capital and the taxation of investment income. For example, we usually base our estimates of "required invested capital" on a net return of just 6%, in an inflationary regime of 4% - and we calculate 30% tax on earnings.

In the light of current Reserve Bank rumblings, our inflation safety factor is looking increasingly prudent. When you look at the impact of war and terrorism on oil and other resource prices, our estimated net return on capital is also looking increasingly prudent. But we are still taken to task over allowing for 30% taxation on earnings - especially since 1 July 2006, when income drawn by 60 year olds from their superannuation funds was made tax free.

The critics may be right - but for how long?

I experienced one of those chilling moments last week - you know the ones when you glimpse a future threat, and all the tiny hairs of the back of your neck stand up to warn you? I was reading a review of Peter Costello's recent performance as Treasurer, when my focus tunnelled in on the following:

"In his 2002 Intergenerational Report, Mr Costello rightly highlighted the need to lift productivity and workforce participation in order to provide the tax base to fund future pensions - but by allowing retirees to pay no tax, he will add vastly to the future budgetary burden of those still in the workforce - and they will have to pay more tax - or we will have to switch to deficit financing, or we will have to return to a regime of taxing superannuation!"

If you would like to know our answer to just how much it would be smart for you to budget on needing to support your chosen lifestyle, click here to find out "How Much You Need To Be Financially Free".

By the way, if we are wrong, and you end up with 30% more income than you counted on, will you be complaining to me?

Book Review - Building a Values-Driven Organization

Each month I ask Sue Sharpe from Phoenix Rising Bookshop to share her insights into "wot's hot" in the field of business writing, and Sue has come good again this month with:

"Building a Values-Driven Organization"
Richard Barrett; $55.00; ISBN 0750679743

Richard Barrett begins his introduction to this book by stating that his purpose is to develop and build on the ideas contained in Liberating the Corporate Soul: Building a Visionary Organization. The basic premise of his earlier book was that the most successful organisations on the planet are vision-guided and values-driven, and the results from his team mapping the values of more than 500 companies in 37 countries since 1997 support this view.

There are two central topics explored in this book: a whole-system or 'integral' approach to cultural transformation, and values management - the measuring, monitoring and responding to causal indicators of performance (values and behaviours) to adjust the culture of an organisation, so that it is able to sustain high performance and deliver high quality product under all operating conditions.

(If you would like to purchase any of the books referenced in this newsletter, please give Sue a ring (02 9566 2157), remind her that you are a ProfiTune client and, in addition to her usual superb service, you will be rewarded with a friendly discount.)

Thoughts for the Month

"Management means, in the last analysis, the substitution of thought for brawn and muscle, of knowledge for folkways and superstition, and of cooperation for force. It means the substitution of responsibility for obedience to rank, and of authority of performance for the authority of rank."
Peter Drucker

"I'm slowly becoming a convert to the principle that you can't motivate people to do things, you can only demotivate them. The primary job of the manager is not to empower but to remove obstacles."
Scott Adamson

"The best executive is one who has sense enough to pick good people to do what he wants them to do, and self-restraint enough to keep from meddling with them while they do it."
Theodore Roosevelt

"It was interesting to note that these good to great companies spent no time 'motivating' people as such - it just wasn't something they wasted time and energy on. The very idea of motivating people doesn't make any sense if you have self-motivated people."
Jim Collins (Author: Good to Great)
 

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